April 21, 2011 / 4:02 PM / 8 years ago

PREVIEW-U.S. bank results offer little optimism for Europe

* Many European banks due to report earnings next week

* List includes UBS, Barclays, Deutsche Bank

* U.S. bank results point to weak trading, rising costs

* Regulatory uncertainty weighs

By Ben Berkowitz

NEW YORK, April 21 (Reuters) - Revenue is down, new regulations loom, and bond trading revenue is under attack.

Welcome to the banking industry in 2011.

As U.S. bank earnings season winds down and European earnings season gears up, it is clear the financial crisis is casting a long shadow over the sector.

Many of the problems that U.S. banks have faced are unique to their domestic market, but some, like weaker trading revenues, are not.

That creates little cause for optimism with a torrent of European bank earnings due next week, including Switzerland’s UBS UBSN.VX, Credit Suisse CSGN.VX, Barclays (BARC.L), Santander (SAN.MC), Deutsche Bank (DBKGn.DE), Nordea NDA.ST and others.

U.S. banks are experiencing fewer loan losses, and capital is growing. But consumer loan volume is shrinking fast, and corporate loan demand is rising too slowly to make up for it. Without loan growth, it will be difficult for earnings to improve, analysts said.

“The core issues for the sector remain,” Nomura’s U.S. analysts said in an April 19 note.

Some banks, particularly Citigroup (C.N), are in fact seeing some loan growth internationally, but the undisputed fact remains that the lending business is not likely to be a huge source of profit growth in the near term.

On the trading side, fixed income profits are falling from an unusually strong first quarter of 2010. New regulations in the United States and abroad will make it harder for banks to profit from over-the-counter trading for many derivatives products, the golden goose of the last decade.

Sovereign credit issues are also likely to weigh on results.

Goldman Sachs (GS.N), normally a bastion of strength, put a fine point on the problems with the bond trading business this week. The bank warned of layoffs if trading volumes do not pick up and said investors are holding their money close.

“We’re taking advantage of opportunities where we see them with our clients, but there aren’t that many,” Chief Financial Officer David Viniar said on a conference call.



Morgan Stanley [ID:nN21240660]

Goldman Sachs [ID:nN19275568]

Wells Fargo [ID:nN20133295]

Citi [ID:nN18189113]

Bank of America [ID:nN15213078]

J.P. Morgan Chase [ID:nN13262333]



The performance of investment banking remains the biggest swing factor. The first quarter is also typically the strongest period and can set the tone for the year. As with U.S. rivals, European investment bank revenues are expected to be stronger than than the fourth quarter, but face tough comparisons with a year ago.

“Overall it was a reasonably good start to the year,” said Collins Stewart analyst Matthew Czepliewicz in London.

“The outlook statements on (fixed income) sales and trading were reasonably positive — not that we’re going to zoom back to the record levels, but they dispelled some of the fears that we were moving into a structural slump,” he said.

If those results held internationally, Barclays Capital and Deutsche Bank would stand to benefit. Yet equities and advisory revenues have been slightly below or broadly in line with expectations, which could be less positive for French names BNP Paribas (BNPP.PA) and Societe Generale (SOGN.PA).

Investors are likely to look for a series of signs to help them forecast the rest of the year.

In Germany, they will seek reassurances from Deutsche Bank’s management that its 10 billion euros pretax profit target for full year 2011 remains within reach.

Capital levels will also remain under scrutiny, after Germany’s Commerzbank (CBKG.DE) and Italy’s Intesa Sanpaolo (ISP.MI) announced big cash calls, reflecting pressure from investors and regulators to bolster balance sheets.

Sovereign debt concerns also remain as much of an issue as ever, given Portugal’s bailout talks and an increasing sense that Greece will have to restructure its debt.

Bank shares are under pressure and the European Central Bank is raising the specter of a collapse on the order of Lehman if Greece has to restructure. [ID:nLDE73J16U]

All of these issues compound what was already a tough environment to produce results.

“The question everyone has in these regions is where will the revenue growth come from?” said Jason Ware, senior equities analyst at Albion Financial Group in Salt Lake City.

“There will be some lower impairment charges and European banks likely returning more cash to shareholders — just like we’ve seen in the U.S. — but I think the banks that are going to show real growth are those with exposure to those emerging markets, particularly Asia.” (Additional reporting by Joe Rauch in Charlotte, Steve Slater in London and Edward Taylor in Frankfurt; Editing by Tim Dobbyn)

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